December 22, 2024

Economic View: Students Ponder the Economics of Everyday Life

WHY do tickets to popular Broadway shows command premium prices, while movie theaters charge the same price for popular films as for clunkers? Things in high demand generally command higher prices, so why not blockbuster films?

This question came from Peter Hlawitschka in an “Economic Naturalist” writing assignment for my economics course at Cornell’s Johnson Graduate School of Management. For years now, I’ve asked students like Mr. Hlawitschka to pose an interesting question based on something they have observed or experienced, and then employ basic economic principles in an attempt to answer it. Don’t try to submit a finished research study, I tell them. Just look around for something that seems puzzling and try to construct a plausible explanation suitable for future testing.

Mr. Hlawitschka began by noting an important difference in the cost of delivering movies and plays. Once a film has been produced, the cost of each additional showing is relatively low — basically, just the theater rental and wages for the box office clerk, projectionist and ushers. For a play, there are not only those costs, but also the entire cost of staging the production — cast, crew and others — for each performance.

Charging the same price as for less popular plays would make it impossible to accommodate everyone who wants to see a big hit. Far better would be to ration scarce seating by charging a premium price. With a popular movie, by contrast, additional copies can be made at minimal cost, and large audiences can be accommodated by showing it many times a day on multiple screens. By keeping prices low, theater owners can fill many more seats and generate far more revenue than they could by charging premium prices at a more limited number of screenings.

Mr. Hlawitschka’s surmises would need to be empirically proved. But the thought behind them is just what this writing assignment was intended to elicit.

The assignment is my response to the distressing finding that six months after having completed a standard introductory economics course, students are no better able to answer questions about basic economic principles than others who have never even taken economics. In standard courses, hundreds of concepts — many of them embedded in complex equations and graphs — often seem to go by in a blur. In contrast, grappling with questions that students care about appears to be a far more effective learning strategy. And that’s in no small part because the problems they pinpoint are so intriguing.

For example, another student, Chris Kissane, observed that motorists who receive costly speeding tickets are typically granted large fine reductions just for appearing in court, even when they offer no evidence of mitigating circumstances. Why, he wondered, should a brief court appearance cut a speeding fine by two-thirds or more?

He began by suggesting that the challenge of local governments is to devise an incentive system that deters high-income motorists from speeding without imposing crushing economic burdens on drivers with lower incomes. Noting that means-tested fines would probably be unlawful, he proposed that governments may simply be employing the familiar retailer’s strategy of making price discounts available to potential customers who wouldn’t buy without them.

Many sellers, for example, offer substantial price breaks to buyers who mail in a rebate coupon. That strategy works because most buyers who are willing and able to pay high prices won’t bother to jump that hurdle. Having to appear in court, Mr. Kissane argued, is a similarly effective hurdle because the high value of a wealthy motorist’s time would make it irrational to lose several hours in court just to save a few hundred dollars. But those who work for low wages or are retired, unemployed or still in school would regard that same savings as ample compensation for a brief court appearance.

It’s fun to watch the learning process unfold during the semester. The week before their first paper is due at midterm, students often ask whether the questions they have in mind are sufficiently interesting. Frequently, I tell them they’ve still got several more days and might want to think a little longer. But when students come by late in the term, before the second paper is due, they’re more likely to be having trouble choosing among several interesting options. A common query is: “Professor Frank, can I do a medley?” Between midterm and term’s end, their brains have somehow become rewired to see the world differently.

HERE’S a final example, this one by Justin Barclay: “Why do airlines now offer deep discounts to travelers who are willing to let someone else choose their destination?” Travelers who visit GetGoing.com and choose the dates they want to travel to either of two cities are offered discounts of up to 40 percent off published fares. Once they’ve paid, GetGoing chooses one of the cities at random, and the deal is done.

This practice, Mr. Barclay argued, is an effective way of targeting discounts to leisure travelers, who are more price-sensitive than business travelers. If you’re traveling on business, you can hardly allow your destination to be determined by a coin flip.

Studying biology enables people to observe and marvel at many details of natural environments that otherwise would have escaped notice. In much the same way, mastering a few basic economic principles can cast the mundane details of ordinary existence in a sharp new light.

On the basis of e-mails from former students over the years, I’ve concluded that the Economic Naturalist assignment was an effective response to my concern about the ineffectiveness of traditional introductory courses. Once students discover how costs and benefits shape everyday experience, their mastery of economic principles doesn’t decay over time; it grows stronger.

Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.

Article source: http://www.nytimes.com/2013/05/12/business/students-ponder-the-economics-of-everyday-life.html?partner=rss&emc=rss

On the Road: The Hotel Push for In-Room Movies

One is semiretired but is still a frequent traveler and goes to movie theaters frequently. Yet, he is still unable to see a handful of the very latest and most talked-about movies. As a result of the archaic studio distribution systems, many of the cutting-edge films have not yet come to theaters outside of the major marquee cities like New York and Los Angeles.

Two of the others at the party, including myself, occasionally go to the movie theater but more often catch up on films later on DVD. The other two, very frequent international travelers, never go to theaters, and instead see movies, including current ones, on in-flight entertainment systems offered by many premium international airlines. Some of the systems offer more than 100 on-demand high-definition recent movies on big flat in-seat screens.

None of us, however, said we watched a movie in a hotel room.

That reality underscores challenges facing LodgeNet Interactive, the major supplier of hotel-room movies and television. Challenges also face the hotel industry itself, digging out of a recession, still perplexed about what guests are willing to pay for in in-room on-demand entertainment. The chains are also struggling to weigh the cost-benefit of investing in new hardware like big flat-screen high-definition screens for hundreds, or thousands, of rooms they may operate in any given hotel.

LodgeNet provides interactive video service in about 1.5 million rooms in 9,000 hotels in North America. This week, the company plans to announce a new initiative, VOD 2.0, to broaden its appeal to travelers.

Instead of selling a selection of video on-demand movies at a single price, LodgeNet has revamped its system to offer a wider range of movies at various price levels, including budget prices for older movies. But the main feature is a new-release feature that LodgeNet says will provide the earliest availability, outside of movie theaters, for a select number of movies.

This move comes just weeks after DirecTV, whose satellite TV service is mostly used in homes, introduced DirecTV Cinema, which charges $29.99 for high-definition newer movies like “Just Go With It,” starring Jennifer Aniston and Adam Sandler. It was available about 60 days after opening in theaters, and will become available on usual cable on-demand menus or on DVDs and Blu-ray.

LodgeNet says its VOD 2.0 for hotels has a wider selection of these earliest nontheatrical-release movies, at a price of about half what DirecTV charges.

Will people pay this much for a hotel-room movie, especially as the trend rapidly grows in travelers bringing with them more sophisticated personal mobile technologies like iPads? With free cable television choices in rooms, with the Internet and myriad other diversions already available in ever-wider options on personal mobile devices, is there a real growth market for selling hotel-room movies?

In hotels, market research shows that “the consumer profile of the guest improves with more trips made and higher affluence; that this group is huge consumers of entertainment,” said Derek White, the president of LodgeNet’s Interactive division. “In important terms, they also are very important in helping to socialize new movies.”

He is referring to the argument that some airlines also make — that the studios should be working harder to get newer releases in front of business travelers. These travelers, like my friends, are movie buffs who spread their interest via word of mouth.

In general, movie theater owners, who have been big powers in Hollywood since the silent-film era, do not like any suggestion that might keep anyone away from the box office. But as on-demand personal and in-home video grows, battles over movie distribution schedules are intensifying.

Word of mouth recommendations from people with wide social networks, like business travelers, can actually be part of a newer movie’s promotion and “help these movies take hold” in the market, said Mr. White. “It won’t really steal business away from the main theaters, which is the big issue right now with premium VOD that has the theater owners up in arms.”

It’s going to be interesting to watch, so to speak. Right now, only 16 percent of LodgeNet’s hotel-room base has the requisite big-screen, high-definition TV sets.

But as the hotel industry gains better economic traction, “the transition to high-def is really back in gear,” said Mr. White, who added: “For those hotel rooms that actually have gone to the flat screens and hi-def, we’re seeing 40 percent more revenue. You’re just more likely to plunk down $15 for a movie if you can enjoy it on a big beautiful screen in your room.”

E-mail: jsharkey@nytimes.com

Article source: http://feeds.nytimes.com/click.phdo?i=0d8d30c91660122fcfb57c234374d179